edge?

[Took2Summit]

Quote from RCG Trader:

One never knows all the variables in a game of probabilities. Is that something that concerns you?

texas holdem is a game of probabilities, yet they at least know how many cards are in the deck.

you cant call trading a game of probabilities because quite frankly you don't know the probabilities, which is why i brought up the 18SD event of black monday. you might think you know the probabilities, and it might seem like you know them for a very long time, but you don't and no one does nor can they.

in our professional we are making bets without knowing how many cards are in the deck.

im not concerned, im more just looking to have discussion with people and get others opinions.

in my opinion the only thing closest to an edge in trading is management of money. essentially not betting the farm when you are holding a royal flush in the trading world, because that royal flush can easily turn into the equivalent of a pair.

 

[burt_schroder]

Quote from Took2Summit:

I'm curious, if the black Monday event that took place in 1987 was an 18 standard deviation move (on the conservative side) which should happen less often then 1 in the entire duration of the universe (were we just so lucky in the first say 100 years of the market to see a once in a universe event?). How can people claim to have an edge? I know risk management can limit your losses from a 1 day 18SD event, but what's to say a 5 year stretch doesn't hit an 18 SD event? How can you even have statistics on events that all possibilities aren't even known? Statistics on dice or cards are obvious as all possibilities are a given, but how can someone assume they know all possibilities in the stock market? Are edges just delusional? Real question looking for thoughtful answers.

This is theoretical probability applied to the market. The only meaningful statistics are those derived from individual trading accounts.

Your argument is valid, but is it really worth anything more than a sunday morning chinwag on a trading chat forum?

Black monday 1987, i would have to see the intraday data for that particular day to make a true assessment with regards to my own trading. Something tells me it wouldn't have affected me in the slightest, except for maybe not trading that day.

I don't do overnights.

 

[Took2Summit]

Quote from burt_schroder:

This is theoretical probability applied to the market. The only meaningful statistics are those derived from individual trading accounts.

Your argument is valid, but is it really worth anything more than a sunday morning chinwag on a trading chat forum?

Black monday 1987, i would have to see the intraday data for that particular day to make a true assessment with regards to my own trading. Something tells me it wouldn't have affected me in the slightest, except for maybe not trading that day.

I don't do overnights.

right, and i agree with you, i also would not have participated in black monday, and im sure a lot of us would have gotten out scratch free. i wasn't making the point to say black monday could/would wipe us out, i made the point to say you can't really rely on probabilities when the possibility of an 18SD event can occur.

i used to play poker professionally (had to stop thanks to doj). i had a tried and true 12% roi in the games i played. with that said, there were times i would go playing literally hundreds of thousands of hands losing money, but i would keep playing the way i knew because i knew in a sample of 5 million hands i would have a 12% roi, and it was true. this is because i had a statistical edge.

in trading, your what you presume to be an edge can vanish, and you can play the next 100,000 hands assuming you have a 12% roi, when now you have a -2% roi because unknown variables entered the game. and to compound matters even worse, you might even actually make your 12% over these 100,000 hands when you now actually have a -2% roi, thus adding to the delusion.

so, is it possible to have an edge? any strategy at any point can have a new variable added to it, and you could make tons of money before you figure out that there's a new variable, however that variable could have taken away your edge, even though you are still making money.

 

[cdcaveman]

Quote from Took2Summit:

right, and i agree with you, i also would not have participated in black monday, and im sure a lot of us would have gotten out scratch free. i wasn't making the point to say black monday could/would wipe us out, i made the point to say you can't really rely on probabilities when the possibility of an 18SD event can occur.

i used to play poker professionally (had to stop thanks to doj). i had a tried and true 12% roi in the games i played. with that said, there were times i would go playing literally hundreds of thousands of hands losing money, but i would keep playing the way i knew because i knew in a sample of 5 million hands i would have a 12% roi, and it was true. this is because i had a statistical edge.

in trading, your what you presume to be an edge can vanish, and you can play the next 100,000 hands assuming you have a 12% roi, when now you have a -2% roi because unknown variables entered the game. and to compound matters even worse, you might even actually make your 12% over these 100,000 hands when you now actually have a -2% roi, thus adding to the delusion.

so, is it possible to have an edge? any strategy at any point can have a new variable added to it, and you could make tons of money before you figure out that there's a new variable, however that variable could have taken away your edge, even though you are still making money.

standard devs are only relevant to your sample size..... and it is well agreed that the stock market doesn't follow a normal distro.. so therefore your 18 devs aren't relevant.. fat tails.. high kurtosis.. . you get the idea..... taleb talks alot about stuff like this...

 

[RCG Trader]

Quote from Took2Summit:

texas holdem is a game of probabilities, yet they at least know how many cards are in the deck.

you cant call trading a game of probabilities because quite frankly you don't know the probabilities, which is why i brought up the 18SD event of black monday. you might think you know the probabilities, and it might seem like you know them for a very long time, but you don't and no one does nor can they.

in our professional we are making bets without knowing how many cards are in the deck.

im not concerned, im more just looking to have discussion with people and get others opinions.

in my opinion the only thing closest to an edge in trading is management of money. essentially not betting the farm when you are holding a royal flush in the trading world, because that royal flush can easily turn into the equivalent of a pair.

That's pretty much it. Money management. Pick a price point, make your bet. This is where fibs and MAs and pivots and all that other stuff comes in, people trying to find price points to make their bets. It's all anyone can do. There will be those that will pontificate otherwise, but in reality that is all one can do is pick a spot and manage the money.

 

[ronblack]

Quote from Wide Tailz:

Please, It is impossible to calculate the probability of any level of standard deviation unless you assume a distribution......

The Market obliterates any quant who fails to consider its propensity to lash out with tails on a regular basis, completely beyond their ability to calculate....

The distribution of stock market returns, especially of large caps, is nearly Gaussian with a very small kurtosis and skew. So he is correct.

 

[PHOENIX TRADING]

Quote from Took2Summit:

I'm assuming statistics and standard deviations, which is what traders need to quantify an edge. And a standard deviation of 18 with a time value of a day is in the ballpark of 1 in many many billions of days. Given the markets historic volatility, black Monday was an 18 SD event

Obviously when traders speak of an edge they do so considering the market behaves within certain limitations.
So yeah pretty much anybody that thinks they have a quantifiable edge is simply deluding themselves into feeling more confident about their trades.
That's why all this stuff about "expectancy" , 'R" , optimum bet size, kelly criterion all of that stuff is in reality nonsense.

The vast majority of traders are gong to lose their ass, now that is a mathematical certainty.

Even the best have have extreme difficulty beating indexes over time or because of size (AUM) issues.

 

[PHOENIX TRADING]

Quote from RCG Trader:

The edge comes from learning to find a charting format that you can read with consistency. This way you will know what to do when it is time to do it.

That's more like a fairytale adults tell themselves than reality.
I'd say your short lived journal supports my assertions and directly contradicts your's made here .

 

[PHOENIX TRADING]

Quote from Took2Summit:

im making money, ive made 60% in the last 2.5 years. not great, not terrible.

however you again are assuming in your charting format that you know all the variables, but you don't. new variables can be introduced at any point, and these variables may be hidden by other variables.

here's an example with the deck of cards again. you are playing texas hold'em, you have a royal flush, you assume this is the best hand possible so you bet the farm so to speak. the market can do the equivalent of adding 100 new cards and making a new combination of cards, while you are holding your royal flush assuming you are playing with a 52 card deck!

so once again how can someone have an edge when it's impossible to know all the variables of any given market you trade, whether its options, equities, currency..or even worse how many variables there even are.

You're exactly right Took.
That's why most traders would do better to determine the historical risk level they are comfortable with and create a portfolio of index funds that matches those parameters.

Although it doesn't completely resolve the issues your questions bring up. It solves most of them that doesn't include "the end of the world".

 

[newwurldmn]

You can't. The world is imperfect. If it were perfect long term capital wouldn't have blown up, and convertible bonds wouldn't have traded with implied option prices below zero in 2008.

In 1987 even if you knew the market was going to end where it was you couldn't even call your broker to trade. The phones were all jammed.

Markets fail some times and virtually no strategy can account for those failures.